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Still Think Gold is a Good Investment?

It’s funny how all the headlines about gold have changed in the past couple of weeks. Back on August 21, when the S&P 500 index was headed south, the financial news media, right on cue, treated us to numerous gold-related headlines. I guess we were all supposed to immediately cash out all our other investments…

It’s funny how all the headlines about gold have changed in the past couple of weeks.

Back on August 21, when the S&P 500 index was headed south, the financial news media, right on cue, treated us to numerous gold-related headlines.

I guess we were all supposed to immediately cash out all our other investments and load up on the yellow metal. Because, you know, things were scary.

Here’s a Wall Street Journal headline to that effect:

But now, just a few short weeks later, the headlines are more like this one, from the very same Wall Street Journal writer:

Now, I’m not blaming daily beat reporters, whose jobs are simply to cover the news. I’m simply pointing out the relatively fast shift in sentiment. That, in turn, shows the folly of attempting to use gold to offset stock-market weakness.

Let’s call it what it is: Gold is a fear trade. Aside from lizard-brain reflexive actions that save our lives (getting out of the path of a moving car), most fear-based actions don’t turn out well.  As Loring Ward’s Sheldon McFarland notes , gold hasn’t even panned out (pun intended) as an apocalypse trade or inflation fighter. As you can see in the chart, derived from research by Professor Jeremy Siegel of the Wharton School, even Treasury bills are better inflation fighters over the long haul!

Some might say, “Sure, gold is not a long-term investment, but it’s a trade.” The problem with that, as with any trade that’s designed to offset one condition or another, is that the trade often backfires. Either the trader’s bet is completely wrong, or the trader misses the chance to get out again, when market conditions change. In both cases, the mistake usually has its origins in some kind of incorrect market hypothesis.

It’s been proven time and time again: In the short term, it’s impossible to accurately predict how markets will behave. Even the most “logical” hypothesis is often proven wrong.

The futility of using gold as some kind of hedge against catastrophic market events is an example of this kind of faulty logic.

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